Public Bill Committee

[Sir Nicholas Winterton in the Chair]

Nicholas Winterton: We are a bare quorum, but we are a quorum. May I advise the Government Whip that I have to be able to see seven members of the Committee?
Depending on how long the Committee wishes to deliberate, I will probably seek a short suspension after three hours, which I think would be relatively sensible. I am not sure how we might be interrupted by Divisions in the House. We will have to take that as things arise.

Clause 9

Andrew Selous: I beg to move amendment No. 136, in clause 9, page 5, line 10, after ‘Regulator’, insert ‘or HM Revenue and Customs’.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 88, in clause 14, page 7, line 10, at end add—
‘(3) Every employer must register their qualifying pension scheme with the regulator.’.

Andrew Selous: Amendment No. 136 was tabled in the same spirit that informed some of our earlier debates around pay-as-you-earn: trying to simplify things for employers, and making the administration of personal accounts as small a burden as possible for employers.
I fully accept that the pensions regulator will need access to information about personal account schemes that are set up by employers up and down the country. The purpose of this amendment is to determine whether there is a less burdensome way for employers to get that information to the pensions regulator. The assumption underlying the amendment is that there is, or could be, an information gateway between Her Majesty’s Customs and Revenue and the regulator. Can the Minister confirm that?
 The Minister for Pensions Reform (Mr. Mike O'Brien) indicated assent.

Andrew Selous: The Minister is helpfully nodding at me, so I will assume that that is the case or that it could easily be the case, although I do not wish to pre-empt anything that he might say when he replies.
Putting that to one side for a moment, the Minister may well be aware that Sir David Varney conducted a review into integrated government in late 2006. The proposal that information could be routed through HMRC to the pensions regulator was exactly the type of recommendation that he had in mind when he wrote that report. The amendment would make life a lot easier.
We should not lose sight of the extra regulatory burden, in terms of both cost and time, that will be put on employers, especially smaller ones. We all agree that this is something that should be done and that the cost is worth while for the result that we all hope to see: many millions more people with a decent pension income in retirement. It is important, however, that we do not inflict any unnecessary burdens on the economy, which is set for a slightly more problematic year.
That is the purpose behind this amendment, which arises from a recommendation made by the Institute of Chartered Accountants in England and Wales. The institute’s members audit employers up and down the country and are very familiar with processes of transferring information. They are also well aware of the needs of employers and businesses. I hope that what I am proposing—even if not in the exact form of words used in amendment No. 136—will find favour with the Minister.

Paul Rowen: I support the comments made by the hon. Member for South-West Bedfordshire about the inclusion of HMRC. We all want to ensure that information is collected and made available as simply and straightforwardly as possible without being a burden to employers, especially small employers.
I want to speak primarily to amendment No. 88, which has been suggested by the TUC. I hope that it will find favour with the Government. It would ensure that all pension schemes were properly registered with the pensions regulator. Although the vast majority of employers will run excellent schemes that benefit their employees, it is a sad fact—as we have seen in relation to people with second pensions—that there has been some mis-selling and people have lost out. A very tiny proportion of employers might seek to have a scheme that does not meet the best objectives of the Bill. All we are asking is that each scheme is properly registered with the regulator.
There will obviously have to be a change to the way in which the regulator operates. I know there has been some discussion about whether the regulator or HMRC should have that role. The Government have taken the view that it should be the pensions regulator, and that body will need beefing up and to change. The amendment just seeks to ensure that registration is one of the first things to happen to a scheme. Therefore, the compliance mechanism that the pensions regulator will introduce would ensure that all employers, not just the best ones, would meet the standards that we expect.

Mike O'Brien: May I confirm to the hon. Member for South-West Bedfordshire that I have the agreement of HMRC and its Ministers to share the required information, particularly on the numbers of people who are employers? To carry out the exercise, we will need to know who are employers and who has a pension scheme. As a result, we will know who has not registered as having a pension scheme and whether they are an employer who has not registered. That is a crucial piece of information.
This will work by the employer registering with the regulator on the internet to say that they have a pension scheme and what it is. That should be a fairly straightforward way of giving the information. They will not need to register with HMRC, just with the regulator. Most of them will be able to do it on the internet, but if they do not have that facility, other facilities will be available. They will be able to ensure that the information is provided. HMRC will be able to say who is registered as an employer and we can then compare the data. That sort of information exchange can be carried out fairly straightforwardly.
I very much appreciated the straightforward way in which the hon. Gentleman spoke to amendment No. 136. The amendment would make HMRC responsible for collecting the information from employers, while the responsibility for delivering the rest of the compliance regime would rest with the pensions regulator. Involving two bodies in the compliance regime would result in not reduced costs, but increased costs and additional IT system requirements, because the two organisations would need to be equipped to work with employers on different aspects of the compliance regime. It could also result in an increased burden for employers, who might have to deal with both HMRC and the pensions regulator in relation to the new duties. We would rather keep the obligation on employers to deal with HMRC as they have always done, while dealing with the pensions regulator in relation to the new duties. Employers would know that on pensions they were to deal with the pensions regulator. That is fairly straightforward.
In practice, most employers running pension schemes should have to do very little other than to inform the regulator that they have a self-certified pension scheme. That would be one that takes them outside the requirement for registration for personal accounts, or one involving an alternative kind of pension scheme. The system should be fairly straightforward for the employer.
I understand that amendment No. 88 has been sponsored by the TUC. While we all have a great deal of respect for the TUC, I think that here it is just clarifying the requirement that every employer must register their qualifying pension scheme with the regulator. We intend that in any event, but we would rather achieve it through regulations, and have the obligations set out for employers in regulations. That would be the better way of dealing with this.
Given the reassurance that we intend to have a fairly easy way for employers to register their pension scheme with the regulator, I hope that that the hon. Member for South-West Bedfordshire will withdraw the amendment.

Andrew Selous: I am reassured by what the Minister says, and I do not intend to press amendment No. 136 to a Division.
It was never our intention that there should be two bodies with which employers had to deal in respect of personal accounts. The Minister has given the Committee an assurance on the sharing of information between the two bodies, and I am satisfied that that will reduce the burden on employers. I beg to ask to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 124, in clause 9, page 5, line 12, at end insert ‘and [Workers without qualifying earnings]’.—[Mr.Mike O’Brien.]

Question proposed, That the clause, as amended, stand part of the Bill.

Andrew Selous: As we are dealing with clause 9, I think that it would be apposite to ask the Minister to say a little about the provision of resources for the pensions regulator. Obviously, the body will have to deal with a vastly increased number of pension schemes and will be responsible for a very different landscape. How will the pensions regulator be geared up to deal with that, and how will it be financed and resourced?

Mike O'Brien: We took the view that the pensions regulator—TPR—was the best organisation to carry out this work. It has a very good reputation with the pensions industry and is broadly supported. However, it does a different job from the one that we are now asking it to do, so the hon. Gentleman is right to press me on how it will carry out its duties.
We are in discussions with TPR about the new budget that it will require. It has been allocated the role relatively recently, and it is scoping what it will need. The way in which it will develop its procedures will be, to some extent, dependent on the outcome of the Bill. Assuming it passes broadly intact, the regulator will be in a position to look at what extra facilities and staff it needs. Then, during the course of this year and probably into next year, we will be doing detailed work on its budget. The straight answer is that some of this is still to be decided.
We are, however, very conscious that we are asking TPR to carry out a different role. It has an excellent reputation for what it currently does, and we expect that to carry over to the new work. The role will not be highly burdensome. It is not anticipated that TPR will interfere with the work of employers or cause lots of regulatory problems for them. There will be a simple model whereby TPR will deal with specific complaints and cases in which it is clear that someone is registered as an employer with HMRC, but not with TPR. TPR will then aim to find out whether that was an oversight by the employer, who will be asked to register. No penalty for late registration is envisaged. If the employer still failed to register, they would be given reminders, and then some of the penalties would be brought into effect.
In terms of the organisation of TPR, we will need a basic structure to get the information and an administrative structure to ensure that contact with employers can be established in cases in which people are not registered as having a scheme. We also need to be able to take action, if that should become necessary. I am sorry that I cannot give much more detail, but the hon. Gentleman will understand that we are still in the business of trying to establish the scope of the work that TPR will do.

Paul Rowen: I am grateful for the Minister’s comments. It is important that the Bill goes through, and then we can work towards setting up the system. He spoke about problems with non-compliance, and clearly the regulator has a very different role now from the one that it will have. We might be dealing with a whole battery of different types of employers who have not previously had contact with the pensions regulator. Has he considered what additional powers the regulator might need to carry out that particular function?

Mike O'Brien: TPR will need new powers, some of which are flagged up in the Bill. The detail of the administrative steps that TPR will be able to take to deal with recalcitrant employers will be developed, in regulations, in due course. We will have opportunities later in our proceedings to consider some of the issues.
The aim is to ensure that TPR is satisfied that it will have sufficient powers to carry out its duties and to deal with recalcitrant employers who simply refuse to register or to provide a pension scheme. It should have access to the appropriate penalties, or be able to bring into effect procedures that will result in those penalties. Hopefully, employers will see that there is a fairly straightforward system under which we know who the employers are and who is registered, and we then identify those who have failed to register, tell them that they need to do so, and, if they do not, draw up sanctions to deal with that. The regime is fairly straightforward but, as the hon. Gentleman says, we will need to put in place the capacity for the administrative steps and penalties that will be necessary for those who fail to comply.

Question put and agreed to.

Clause 9, as amended, ordered to stand part of the Bill.

Nicholas Winterton: Before we move on, may bring some reassurance and relief to the Government Whip? I have inquired about the size of quorums. Although seven is appropriate for a full-sized Public Bill Committee, the quorum can also be a third of the members of a Committee. I have done my arithmetic again and, for this Committee, I must be able to see six Members. I think that I have been able to afford some consolation and relief to the Government Whip.

Clause 10

Introduction of employers’ duties

Amendment made: No. 125, in clause 10, page 5, line 24, leave out from ‘that’ to ‘until’ in line 26 and insert
‘sections 2 to 7 and [Workers without qualifying earnings] do not apply in the case an employer of any description’.—[Mr. Mike O'Brien.]

Mike O'Brien: I beg to move Government amendment No. 138, in clause 10, page 5, line 28, leave out subsection (2).

Nicholas Winterton: With this it will be convenient to discuss the following: Government new clause 12—Transitional periods for money purchase and personal pension schemes .
Government new clause 13—Transitional period for defined benefits and hybrid schemes.

Mike O'Brien: Clause 10(2) has been drafted to give effect to the Government’s policy of enabling employers to phase in the requirements of employers’ duties so that they can better manage the additional costs that the reforms will bring. Consultation with small employers demonstrated that there was keen support for the phasing of the requirements. In particular, the Federation of Small Businesses—I note that its member is in his place in Committee Room—responded positively by saying that it welcomed the phasing in of the contribution.
However, the clause as drafted did not give employers certainty about the phasing arrangements that they would need so that they could start planning how they would discharge their duties. We have thus tabled one amendment and two new clauses to give employers a greater degree of certainty about the phasing arrangements for their qualifying schemes.
Amendment No. 138 proposes removing the broad power that would allow the Secretary of State to set out regulations on how employers’ duties would be phased in over a transitional period. The amendment will facilitate the introduction of the two new clauses, which set out the phasing arrangements for employers operating qualifying schemes.
New clause 12 will improve on clause 10(2) by giving employers that operate qualifying money purchase schemes the certainty that they need to plan how to manage any additional costs associated with their new duties. The phasing arrangements, which have been welcomed by employers’ representatives, involve a three-stage increase in the minimum contributions required of money purchase schemes. Essentially, with a direct contribution or money purchase scheme, the system is phased in over three years, with a percentage increase in each year. New clause 12 establishes that contributions in the first phase must be at least 2 per cent. of qualifying earnings, with at least 1 per cent. coming from employers. That will rise to 5 per cent. in the second phase, of which the employer must pay at least 2 per cent. Finally, the contributions will reach their permanent level of 8 per cent., including a 3 per cent. contribution by the employer. This will mean that employers will be able to meet the additional contribution costs in a series of steps—they will be given time to phase in the change.
New clause 13 sets out our intention to allow employers using the other main kinds of pension scheme—defined benefit and hybrid schemes—to be able to adjust gradually to the costs of the reforms. Existing legislation requires that defined benefit and hybrid schemes maintain appropriate funding for their liabilities. So, in effect, the scheme in new clause 12 of phasing in the amounts that employers would have to pay would not be able to work because the obligation on employers would be to maintain the appropriate funding level for their liabilities. However, employers must not reduce the contributions that they are committed to pay. Any provision that allowed employers to phase in contributions would interfere with the existing rules of the schemes and open up risks of under-funding. As such, it is not possible for employers with defined benefit or hybrid schemes to pay reduced contributions in the same way as new clause 12 will allow employers using money purchase schemes to do.
For those reasons, new clause 13 sets out an alternative approach. Employers offering final salary or hybrid schemes will be permitted to delay automatic enrolment into such a scheme for those jobholders who are eligible to join, but have not yet chosen to do so. They must automatically enrol those jobholders by the end of the transitional phasing scheme. Those who are currently in employment and have chosen, despite this being available to them, not to join a defined benefit or hybrid scheme would thus not have to be enrolled until the end of the transitional period. They would have already made their judgment: they could have joined, but decided not to. However, all other jobholders—new workers and those who were previously ineligible to join the defined benefit or hybrid scheme—must be automatically enrolled in the usual way at the start of the phasing period. There will therefore be a three-year phasing period before which an employer would have to sign up existing employees who had decided not to join the pension scheme.
I hope the Committee will feel that, particularly with regard to defined benefit and hybrid schemes, we have sought to give some flexibility. It is not possible to do the same for the employers in relation to DB schemes as it is in relation to DC schemes, but we have tried to provide some degree of flexibility to allow a certain degree of phasing in. We are also conscious that, as part of the process of automatically enrolling employees, we want all new workers enrolled and to ensure that those who were previously ineligible to join a pension scheme were able to join one. I hope that hon. Members will be able to agree to both amendment No. 138 and new clauses 12 and 13.

Andrew Selous: The Government amendment and new clauses are certainly sensible. We all agree about where we want to get to, but the Minister is right that getting there in one go might be too difficult for some employers.
In business, one cannot just lift prices significantly in one go. Sometimes these things must be done over time. We all expect employers to put in the money and to cope with this, but we must be sensitive to the competitive business environment in which they are operating, both in the UK and internationally. I am happy that the pleas of the Federation of Small Businesses have been listened to in that regard. These objectives are sensible, and we are happy to have them in the Bill.

Amendment agreed to.

Clause 10, as amended, ordered to stand part of the Bill.

Clause 11

Qualifying earnings

Andrew Selous: I beg to move amendment No. 17, in clause 11, page 6, line 4, leave out ‘wages, commission, bonuses and overtime’ and insert ‘and wages’.

Nicholas Winterton: With this it will be convenient to discuss the following: Amendment No. 18, in clause 11, page 6, line 11, leave out paragraph (f).
Amendment No. 19, in clause 11, page 6, line 11, at end add—
‘(4) For the purposes of scheme contributions by and on behalf of members of a qualifying scheme other than that established by Chapter 4 of this Act, subsections 11(1) to (3) may be disregarded if contributions are calculated and made in relation to the individual’s basic earnings.’.

Andrew Selous: Clause 11 is very important, and sets out the band in which wages will be subject to the personal account scheme. At the moment, the vast majority of pension schemes use total basic earnings when they calculate contributions. This is not true in all cases, but certainly in the vast majority of cases. In my former life, my pension was calculated on my basic salary, rather than on any additional payments that I was fortunate enough to be paid from time to time.
I understand the concern, raised by the TUC and others, that there may be some employers—unscrupulous or otherwise—who will seek to avoid paying the correct amount into personal accounts by transferring what would ordinarily be paid as salary into commission, bonuses and overtime. I am aware of that, and I would be sympathetic to anything the Government could do to stop employers doing so, in a way tantamount to deliberate manipulation of normal commercial practice, with the aim of not paying the appropriate contributions into personal accounts. Does the Minister know of any evidence of that sort of avoidance happening now? Are employers paying remunerations that would ordinarily be part of salary or wages as commission bonuses or overtime?
How does the Government currently treat bonuses paid to civil servants and other public sector workers? The whole area of bonuses in the public sector is somewhat new to me, but one reads from time to time of significant bonuses paid to civil servants—not always civil servants who have done an amazing job. There are one or two examples of people being given bonuses when that, perhaps, was not justified, but I am sure that in the vast majority of cases it is richly justified. What happens in relation to public sector pension schemes where this is current practice?
There is a worry that clause 11, as drafted, may lead to some form of levelling down, for the following reason. The administrators of current pension schemes generally supply the information on the schemes’ members in relation to the basic salary that those individual employees receive. As I read clause 11, it looks like there is going to be an onus on the administrators of current pension schemes to get in touch with employers and find out the exact amount of commission, bonuses and overtime paid to each employee. Administrators of current pension schemes will not ordinarily have that information.
The requirements of clause 11 will place significant additional burdens on employers who have to provide the information, information that is likely to change from month to month because employees and employers cannot say in advance exactly how much overtime will be worked. Pension scheme providers do not hold that level of detail on earnings and so the employer will need to perform the check. If that results in employers getting bogged down in the monthly bureaucracy of having to provide a pension administrator with that level of detail on the overtime of every employee, which they currently do not have to do, some employers might decide that it causes too much difficulty and will perhaps level down from their current scheme.
A further complication is that administrators of current pension schemes need to know whether their scheme meets the quality requirements in clauses 18 to 24, which we will debate shortly. How will they be able to tell whether their scheme meets those quality requirements if they do not have to hand that level of detail on overtime, bonuses and commission that individual employees might be receiving month by month? It will be complicated, and it will be difficult for them to know whether existing schemes meet the quality requirements that the Government have quite properly put in the Bill. I understand exactly why commission, bonuses and overtime are included here, and I am mindful of the need to prevent employers deliberately manipulating the way in which they pay their workers to avoid contributions that they should be making—the Government would be right to ensure that those contributions were made. However, there are a number of technical and practical difficulties on which we need some assurances from the Minister. If he is not able to give full reassurance now I would be grateful if he would take the issue away to consider at greater length.

Paul Rowen: The Government, in drafting clause 11, have been mindful of some of the concerns. We have all talked about wanting to ensure that we develop a quality scheme that is simple and easy to administer. As the hon. Member for South-West Bedfordshire said, that has the potential to be a bit of a minefield, which could present some difficulties. Nevertheless, the safeguard is important for employees, so that the less scrupulous employer will not see if there is a way of saving money. Those companies that do not have schemes at the moment will be introducing a scheme and will have to pay the 3 per cent. employer’s contribution. If they can switch some of what someone earns into bonuses or not count overtime as actual earnings—predominantly affecting those on low pay—that will enable them to get below the £5,035 threshold, resulting in less of an employer’s contribution.
The Government have got it right by making sure that the clause is in the Bill. Nevertheless, I would be interested, as the hon. Gentleman said, in how they would intend to operate it. Clearly we want an easy-to-use system, which does not impose too great a regulatory burden on employers, but the safeguard is important. I support the clause as currently written.

James Plaskitt: I am grateful to the hon. Member for South-West Bedfordshire for his amendments, allowing us to look at the clause in more detail.
The clause defines qualifying earnings by establishing an earnings band, and by setting the range of pay components for the purposes of calculating those qualifying earnings. Qualifying earnings, in conjunction with the minimum 8 per cent. overall level of contributions for money-purchase saving, as set out in clause 18—which we will come to—establish the new minimum level for pension saving and underpin the whole package of reform. Together, they should enable a median earner with solid state entitlement—a good number of years—to achieve a retirement income at a replacement rate of around 45 per cent. Those arrangements, including the minimum employer contribution of 3 per cent., only work if the calculation is based on the full value of gross earnings, as was pointed out by the Pensions Commission in its report of 2005.
Pension contributions need to reflect the full value of underlying earnings if workers are to stand a real chance of saving for an adequate income in retirement. However, both amendments Nos. 17 and 19 would reduce the range of pay components that need to be taken into account when calculating the minimum level pension contributions due to a worker. On average, commission, overtime and bonus payments make up around 8 per cent. of the earnings of those jobholders who will be eligible for automatic enrolment. If pensionable earnings became limited to basic pay, as would be the affect of applying the amendments, the overall value of pension saving would fall. We estimate that the reduction in savings could be around £900 million a year at a steady state, once the impact of the phased introduction of the employer duty has passed through the system. That would mean that people who save throughout their working lives will fall below the replacement rate that they are otherwise expecting to achieve.
That is a core problem with the hon. Gentleman’s amendment. Although he said that he supported the obvious intention to deal with any potential unscrupulous practice by which employers might seek to prevent payment from qualifying for their contributions to the scheme. In a sense the hon. Gentleman is trying to have it both ways, by watering down the protection, which would potentially open up the opportunity for unscrupulous employers. I think that we have the balance right and that the affect of the amendment would be to unbalance it in ways that I am sure he would not wish.
Some workers rely on commission and overtime payments. To exclude such pay components would reduce the benefit of the reforms for such workers. For example, commission payments often form a significant proportion of the overall income of those people who work in retail, telesales and parts of the motor industry.
Amendment No. 18 would prevent the Government from being able to react to any pay practices that developed simply as an attempt to avoid pension contributions. The hon. Gentleman asked if I thought that that practice was widespread at the moment, but there is no evidence to suggest that it is. It is important, when legislating in this way, to anticipate possible developments and to choke off those that would be undesirable. The amendment would open up a loophole that could be used for unscrupulous avoidance by enabling employers to reclassify their workers’ earnings, thereby reducing the contributions that the employer was required to pay.
The core pay components set out in the Bill already cover the majority of workers’ earnings, so any additions to the list are unlikely to have much impact for most employers. Nevertheless, we want to be able to consider additions such as allowances that relate to the skills that workers have, or to the working patterns that they adopt, such as data processing and shift allowances.
I want to reassure the hon. Gentleman and other hon. Members that we appreciate that many employers with existing schemes tend to define pensionable pay using fewer pay components—here I come to his point about the possible burden. We shall, therefore, provide guidance to help employers to work out whether their arrangements meet the minimum requirements. We could perhaps base that on look-up tables and other simple tests, which should address the point that he rightly raised about the potential for difficulties in computation. However, I should add an important point: no employer will be required to change their definition of pensionable pay because qualification relies on the value of contributions paid, not the basis on which they are calculated.
At present, the median employer contribution for workers in defined contribution schemes is 7 per cent. That provides those employers with considerable head room in the test. We therefore fully expect many existing arrangements to qualify, even if, for example, they do not take account of overtime as part of the pension calculation, because that could easily be offset by a higher employer contribution than the minimum 3 per cent. We plan to provide, I am pleased to say, a plain English guide for employers and schemes to assist them when applying the tests. That might involve simple illustrations of how the earnings band or higher contributions could be offset against a different definition of pensionable pay. There will be plenty of scope for further discussion as part of the normal regulation-making process.
In addition, qualifying earnings form part of the definition of jobholder. Tinkering with the definition of qualifying earnings would have an impact on the eligibility for automatic enrolment, and might mean that some people would miss out on workplace pension saving.
I think that I have addressed all the points made by the hon. Gentleman and I hope that he will now feel free to withdraw the amendment.

Andrew Selous: I am definitely reassured by what the Minister says. Perhaps I should have said earlier that the amendment was probing.
We have had a useful debate because there are concerns among current scheme providers about some of the computation difficulties that the Minister spoke about. I am glad that he is seized of the salience of these issues for those providers. He said that there could be £900 million less in contributions if the amendment were accepted—I would certainly not want that, and that was not my intention. I would, however, say that if the Minister was not on to the computation difficulties and was not able to do something about them, there would be a real possibility of levelling down from existing good provision above the level of personal accounts. There could have been a reduction had those computation difficulties not been taken into account.
I am reassured by what the Minister said about the guidance and leaflets, and especially reassured that they will be in plain English, which is something of which we are all in favour. I therefore beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 11 ordered to stand part of the Bill.

Clause 12

Review of qualifying earnings band

Andrew Selous: I beg to move amendment No. 20, in clause 12, page 6, line 15, leave out subsection (2).

Nicholas Winterton: With this it will be convenient to discuss the following amendments: No. 86, in clause 12, page 6, line 15, leave out from first ‘in’ to end of line 16 and insert ‘the value of the amounts in—
(a) section 11(1)(a) are to be assessed in a way that the Secretary of State finds appropriate and which has been approved by resolution of both Houses of Parliament; and
(b) section 11(1)(b) are to be in line with earnings’.
No. 21, in clause 12, page 6, line 17, leave out ‘may in particular’ and insert ‘shall’.
No. 73, in clause 12, page 6, line 17, leave out subsection (3).
No. 74, in clause 12, page 6, line 21, leave out subsection (4).
No. 75, in clause 12, page 6, line 24, at end add—
‘(4A) If the average earnings index (including bonuses) for the whole economy for September of a year is higher than the index for the previous September, the Secretary of State shall as soon as practicable make an order in relation to each amount mentioned in section 11(1)(a) and (b), increasing each amount, if the new index is higher, by the same percentage as the amount of the increase of the index.’.

Andrew Selous: We move on to another important clause, which covers the review of the qualifying earnings band, which we have just agreed should be in the Bill by agreeing to clause 11. Of course, the two figures—£5,035 for the lower limit and £33,540 for the upper limit—will not maintain their value due to the ravages of inflation, so it is quite right that they should be increased over time. Clause 12, however, gives the Secretary of State almost complete carte-blanche to decide how the two bands will be increased, so we seek greater clarity on how the uprating will be undertaken. There is a precedent because the Employment Relations Act 2004 sets down a formula through which statutory redundancy pay is uprated. I look forward to hearing the Minister’s intentions for reviewing the qualifying earnings band in the years to come.

Paul Rowen: I wish to speak about amendment No. 86 in particular. The purpose of amendments Nos. 20 and 86 is to probe the Government as to what methods they intend to use to ensure that the values of the earnings limits are maintained. I know that the EEF would like to see the qualifying band uprated in line with earnings, rather than leaving it to the Secretary of State, as the Bill proposes. That is not necessarily our view; we believe that the Secretary of State should have discretion.
Amendment No. 86 would, however, ensure that whatever discretion the Secretary of State used on uprating, the limits would be reported to the House. That would be an important safeguard to ensure that savings and the amounts paid keep their value. I am not saying that a future Secretary of State—whoever that might be—would not ensure that they would maintain their value, but we believe there should be a mechanism to ensure that Members are able to respond to the proposals put forward by the Secretary of State. I look forward to hearing how Ministers will ensure that Members are kept informed of the rates proposed each year.

James Plaskitt: The reforms have been structured to enable a median earner with solid state entitlement to achieve a replacement rate in retirement of around 45 per cent., in line with the Pensions Commission’s recommendations.
The limits of the qualifying earnings band—the lower limit of £5,035 and the higher limit of £33,540, in terms of 2006-07 earnings—have been set in conjunction with the default minimum contribution rate for defined contribution pension saving: 8 per cent. Having established a relationship between working-life income and income in retirement, it is important to establish a mechanism to maintain that, as the hon. Gentlemen said. That is right, and it is the exact purpose of the clause.
We plan to review the limits of the qualifying earnings band once a year to determine whether they have maintained their value, as the Bill says. Our expectation is that future changes to the limits of the qualifying earnings band will follow changes in the general level of earnings. Tracking earnings is important for two reasons: first, to ensure that the value of contributions going into money purchase schemes remains stable in relation to earnings, which will help to maintain the balance between working-life income and income in retirement; and, secondly, to avoid enrolling even higher numbers of workers with low earnings for whom state provision will already offer high income replacement rates.
Pension reform involves making policy for the long term, however. Average earnings might not always be the only, or the most suitable, measure with which the Government should assess whether the limits of the qualifying earnings band have maintained their value. In the absence of complete foresight, which no Government can have, we have taken the prudent step of retaining some flexibility over the measures that the Government must consider when assessing whether the limits of the qualifying earnings band have maintained their value.
All the amendments would, in various ways, reduce that flexibility by removing elements of the Secretary of State’s discretion in uprating the lower and upper limits of the earnings band. Amendments Nos. 20 and 73 would remove the discretionary ability to uprate the earnings band limits using a more appropriate measure than earnings, should the need arise. Amendment No. 86 would require an assessment of the change in the value of the band limits to take place by two separate methods: an approach approved by Parliament for the lower limit, and using average earnings for the upper limit. Amendment No. 21 would make it mandatory to carry out a review of the qualifying earnings band in line with rises in average earnings only, and amendment No. 74 would remove the Secretary of State’s discretionary ability to change the limits of the qualifying earnings band, even when he judged that their value had not been maintained. Amendment No. 75 would make it mandatory to review and revise the qualifying earnings band limit in line with rises in average earnings.
In all of their various ways, the amendments would curb the discretion of the Secretary of State and reduce flexibility in the system. It is clear that the real test of whether the bands have retained their value, in terms of ultimate income in retirement, is value vis-Ã -vis earnings. It would not be sensible to be over-prescriptive about which measure of earnings could be used, although it is perfectly clear which ones are used at present in respect of other benefits that are earnings uprated. Given that the provision will be in the Bill and that it is conceivable that, due to statistical developments or changes in future Government policy, the way of measuring earnings might change and new indices might evolve, it would not be wise at this time to prescribe with great specificity the index that should be used. We are establishing the principle that the value is maintained in relation to earnings, and the appropriate earnings index will be used.
It is also important to leave open the possibility—this is not inconceivable—that earnings in any given year might not be the right measure by which to assess value. There have been periods in which prices have risen faster than earnings. We want to leave the possibility open because the important thing, as the Bill says, is to maintain the value of those bands. The objective is to ensure decent levels of income in retirement and to maintain the balance of income obtained through work and income derived in retirement as a result of that work. That is the reason why the clause is drafted in such a way, and why we would not want to see it restricted in any way. Given that, I hope that the hon. Member for South-West Bedfordshire will withdraw the amendment.

Andrew Selous: This was put down as a probing amendment, just something to get down on the record as to the Minister’s intentions. I listened carefully to what he said and I am reassured that he has made the commitment to maintain the value of both figures specified on the face of the Bill in relation to earnings. That is a useful reassurance that can be reviewed in years to come by Members of this House, should anything else be done by a Government at any future time. So, having heard the Minister’s comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 12 ordered to stand part of the Bill.

Clause 13

Pay reference period

Andrew Selous: I beg to move amendment No. 22, in clause 13, page 6, line 27, leave out from beginning to ‘twelve’ in line 28.
This amendment seeks to elucidate from the Minister the Government’s intentions relating to pay reference periods. The wording on the face of the Bill in clause 13 is quite open, and given the understandable concerns that employers have about how they are going to make the calculations relating to these payments, it would be useful to hear that the Government intended to make their pay reference periods as simple and straightforward as possible so as not to add to their administrative burdens in any way.
I hope for the vast majority of employers it will be quite clear and simple: either their financial year or the tax year. But I wish to be reassured by the Minister that the Government do not intend to impose on employers any strange or unusual periods that would cause them any difficulties.

James Plaskitt: The hon. Member for South-West Bedfordshire seeks my reassurance on this in respect of simplicity and I hope I will be able to give that to him. Clause 13, an important clause in the Bill, enables Government to set the period, or range of periods, during which qualifying earnings are to be assessed for the purpose of calculating contributions to workplace pension saving. Many headline figures associated with these reforms are expressed in annual amounts: the limits to the qualifying earnings bands, for example. That is why the clause provides for a default pay reference period of 12 months, so that those annual limits make sense.
However, as set out in clause 11(2), the annual limits of the earnings bands are to be varied on a pro rata basis when qualifying earnings are being assessed for a pay reference period that is more or less than 12 months. Therefore, in line with the preference of employer lobby groups, especially the CBI and the Engineering Employers Federation, we have included the flexibility to establish an array of pay reference periods, so that the assessment of qualifying earnings and the calculation of contributions for the purposes of workplace pension saving may be aligned with the range of pay periods used by employers today, which in some instances are weekly or monthly. In essence, we are asking employers to do what they are already doing. That is the common-sense approach.
If an employer pays its workers monthly, that is the period it should use for the purposes of calculating pension contributions. The amendment, however, would remove that flexibility by locking employers into a pay reference period of 12 months—only 12 months—which would delay the point at which some jobholders qualified to be automatically enrolled. The flexibility to be able to prescribe pay reference periods as a week or a month is important for another crucial reason: it simplifies the administration for employers by making the calculation and collection of contributions to pension saving part of those companies’ normal pay cycles. Clearly, forcing companies into administering that out of line with their ordinary pay cycle would be an added burden. We will work with stakeholders to ensure that the linkage between pay reference periods is tailored to achieve the best fit for employers.
The measure brings forward the point of automatic enrolment, to the first pay period for most workers, enabling them to save as they go and to take advantage of compound investment returns. It avoids the need for larger periodic or reconciliation payments, which would affect affordability at the individual level and might deter people from saving. Finally, and importantly, it enables temporary workers, who move frequently between employers, to be able to take advantage of workplace pension saving with an employer contribution, even if the total earnings with that employer fall below the default annual threshold—in other words, if they earn £3,000 for three months’ work.
I hope that I have demonstrated the importance of retaining the flexibility. The measure fits with employers’ current practices and best serves the interests of the people that we anticipate will come into the schemes. With those reassurances, I hope that the hon. Gentleman will feel able to withdraw his amendment.

Andrew Selous: Yes, I am reassured by the Minister, particularly about the intention behind clause 13 to mirror the pay periods already being used by employers. If the clause has been worded in that way at the behest of the CBI and the Engineering Employers Federation and others, I am doubly reassured by what I have heard. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 13 ordered to stand part of the Bill.

Clause 14

Qualifying earnings

Andrew Selous: I beg to move amendment No. 2, in clause 14, page 7, line 9, leave out paragraph (c).
This is another probing amendment, to find out a little more about the current usage of average salary benefits. Many of us are familiar with final salary schemes. I am aware that there has been a significant demise in such schemes for various reasons in recent years, but I am not aware how widely average salary benefit schemes are being used. Therefore, I am seeking some elucidation from the Minister on that point and, in particular, on the likely impact—on the possible payments received on retirement—for personal account holders of average salary benefits being used.

Mike O'Brien: In answer to the hon. Gentleman’s question, there are 9.6 million people active in occupational schemes, of whom 8.5 million are in defined-benefit schemes, and 1.1 million are in defined-contribution schemes. Around 200,000 people are in defined benefit schemes where pension benefits are based on a fraction of the individual’s average earnings across their career. These earnings are generally uprated in line with prices. This seems to be a probing amendment. Let me set out what we are seeking to do.
Clause 14 is the first of a series of clauses that set out the minimum standards for schemes to be used under the employer duties. This clause introduces the concept of qualification. Qualifying schemes must be occupational personal person schemes, tax registered under the Finance Act 2004, and must meet the relevant quality criteria in relation to a jobholder who joins the scheme. It is crucial to ensure that there is a statutory duty for schemes offered by employers to provide suitable contributions or benefits to those who join them. This amendment would remove a key element of the protection required to safeguard the quality of qualifying and automatic-enrolment schemes.
Clause 14(2) gives the Secretary of State the ability to disqualify, through regulations, certain schemes that would otherwise meet the quality requirement. That would allow regulations to disqualify schemes that require prohibitively high member contributions—ones where the employer will contribute so much, but the member must contribute a very large amount—and those which levy excessive administrative charges. It would also allow regulations to disqualify career-average schemes of a certain type, as set out in paragraph (c).
I can reassure the ACA, and others who have raised the issue, that we will allow career-average schemes to discharge employer duties. We are aware that career-average schemes are becoming increasingly popular, and provide a compromise for employers who want to retain defined-benefit provision, but do not want to do so through final salary schemes. Many career average schemes provide generous benefits to members and help employers control the cost of pension provision. We want to support and encourage such schemes.
It is our intention, however, to apply these regulations to career average schemes that do not appropriately revalue the earnings on which the pension is based. We have designed the quality requirements for defined benefit schemes to be as easy as possible for employers to apply. The intention is that this can be done by assessing the value of the benefits payable at a particular point in time. Some schemes may meet the quality requirement based on the value of benefits at that time, but those may not maintain their value over time to retirement without revaluation of earnings. I am sure Members will agree that, given the risk that such schemes would lose their value over time, they should not qualify to accept members under the statutory duty established by the Bill.
We are providing reassurance that we have the ability to prevent employers using schemes that are not of the sort that Parliament intends: poor schemes that will give poor value, or schemes that are intentionally created to discourage people from joining them. That is the aim of the powers we are taking in the Bill to bring forward regulations. I hope on that basis that the hon. Gentleman will feel able to withdraw his amendment.

Andrew Selous: Certainly. I am grateful to the Minister for setting out some of the figures that describe the different types of pension saving that are going on at present. I am also grateful to him for what he said about the capacity of this clause to deal with schemes with extortionate costs, and schemes which would require an overly high employee contribution. With that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 14 ordered to stand part of the Bill.

Clause 15

Automatic enrolment schemes

Andrew Selous: I beg to move amendment No. 3, in clause 15, page 7, line 22, leave out ‘or to provide any information’.
We are going so fast that maybe the Committee will not have to listen to me for as long as it thought it would have to at the start of the proceedings.
The purpose of the amendment is to check that the wording in subsection (2)(b) would not prevent an employer or a personal account scheme from finding out from an employee their date of birth and national insurance number and any other relevant information that they might need to put them into the scheme. As subsection (2)(b) is worded, it would seem that the employee, bizarrely perhaps, might be able to refuse to give such information. I am sure that I am probably wrong and that the Minister will leap to show me some other part of the Bill where it states that employees can be required to give basic information about who they are, their date of birth and so on. If they could refuse to give that information it would obviously cause complications and I therefore seek the Minister’s reassurance.

Mike O'Brien: An employer would be able to obtain from an employee by reason of employment the sort of information that the hon. Gentleman described. The basic information about who the person is, where they live, and what their national insurance number and date of birth are is the sort of basic information that in any event ought to be in the possession of most employers. They would get that information and they would have that information.
What we seek to do, however, is to prevent a situation arising where the employer would be able to say, “Before I can automatically enrol you and get you involved in my pension scheme, you have got to give me a vast array of very detailed information about your background”. Some employees might not wish to give that information and it might be utterly irrelevant to the particular scheme. It is possible that some schemes might be created to help employers who do not wish to operate in a bona fide way with automatic enrolment.
Almost all employers would approach this in a straightforward and bona fide way. However, if there were any suggestion that employers required from an employee information that they already had, or would normally have for the purposes of employment, merely for the purposes of joining a pension scheme, we would want to ensure that they would not be able to require that additional information. I hope that with that reassurance, and the reassurance that the employer would be able to ask reasonable questions in a normal way but not be able to use requests for information to frustrate pension membership, the hon. Gentleman will feel able withdraw his amendment.

Andrew Selous: Yes, I am certainly reassured by what I have heard from the Minister about what an employer is able to find out from an employee under normal employment law. The Minister is right to make sure that an unscrupulous employer could not ask for excessive information, which would be difficult or impossible to provide, in order to keep an employee out of the scheme. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 15 ordered to stand part of the Bill.

Clause 16

Occupational pension schemes

Andrew Selous: I beg to move amendment No. 4, in clause 16, page 7, line 33, leave out paragraph (c).

Nicholas Winterton: With this it will be convenient to discuss amendment No. 5, in clause 17, page 7, line 40, at end add—
‘(c) is prescribed or is of a prescribed description and that has its main administration elsewhere than in an EEA State.

Andrew Selous: The purpose of the amendments is to seek clarification from the Minister about the differences between personal pension schemes and occupational pension schemes in the three different jurisdictions mentioned here, namely, the United Kingdom, the European Economic Area and outside the European Economic Area.
There is obviously a difference in categorisation between occupational and personal pension schemes. For example, what happens about personal pension schemes that are outside the European Economic Area is not clear. I am sure that international pension law is probably even more complicated than United Kingdom pension law but, given that we are bringing in such a significant Bill, it is important to be clear about what happens in the different jurisdictions, not least because more and more people are working internationally. There is a big increase of workers migrating to and from different countries. I would be grateful for any further elucidation that the Minister could give about the two amendments.

Mike O'Brien: I am grateful to the hon. Gentleman for the constructive way in which he has put the questions. He is right that more people than ever before are working internationally, travelling abroad and coming to work in this country. Both clauses 16 and 17 set out the definition of occupational and personal pension schemes. He has noted the difference between these two clauses, namely, that we take a power to specify occupational schemes based outside the EEA, but he will not that we do not do the same for personal pensions. We believe that there are sound reasons for the distinction, which I will now explain.
A key requirement of all qualifying schemes, occupational and personal, is that they must be appropriately regulated. Occupational pension schemes based in the UK are regulated through domestic law, which implements the European directive on the activities and supervision of institutions for occupational retirement provision—IORP. Schemes administered within the European Economic Area, the EEA, are also regulated under the same directive, providing assurance that scheme standards and regulation are comparable to those in the UK. However, for schemes based outside the EEA there is no universal regulation that we can use as a basis for ensuring that schemes are suitable to be used for the purposes of the employer duty. Far from international law being complicated, to some extent it is non-existent or not particularly existent. There are some provisions and agreements, but of a limited nature.
So, we will have to consider the circumstances where people sign up to a foreign-based scheme—perhaps a scheme based in the United States or elsewhere, for a worker who has come over here or a worker working for an American company. We will look at those on a more individualised basis to ensure that any scheme that is used as a pension scheme is able to be used for the purposes of the employer duty and is therefore appropriately regulated.

Andrew Selous: Just to put a specific example to the Minister, if an American came to this country with a 401(k) scheme—a personal pension scheme in the United States—that was a good scheme with a high level of contribution, what would be the effect if he were then working for a UK employer?

Mike O'Brien: I do not want to give carte blanche to all 401(k) schemes. We would look at the particular scheme to identify whether it would comply with the nature of our pension schemes. I know a bit about those schemes, and I would have thought that, in most cases, they probably would. Let me not give a ministerial imprimatur to all those schemes. I will just say, in broader terms, that that is the sort of scheme we want to be able to allow. Assuming it is properly regulated by US domestic authorities, it would probably—I use that word advisedly—comply with the requirements, particularly if the employee coming here from the US was satisfied that that was the sort of scheme he wished to use and maintain, and was returning there. That would probably be fine.
I would advise a little caution, however, if a UK-based company decided that it was going to use foreign-based pension products for their domestic employees. We would want to look at that with some care, and ensure that the specific pension scheme fully complied. I suspect that operators of 401(k) schemes would not allow themselves to be put in that position. It may well be that in other countries there are schemes, probably privately run, which would be in the market for taking on pension provision here. If they were in the EEA, we would know how they are regulated. If they were outside the EEA, we would want to be able to say that certain schemes are appropriate and others are not. We are proceeding on that basis. The amendment would interfere with that. However, given the way the hon. Gentleman put his point across, I do not think I need to spend time in rebuttal: I needed only to explain the purpose of the way in which we are addressing the various schemes.

Andrew Selous: I think these exchanges are proving of use to the many people who will look at them in Hansard tomorrow and in the weeks to come. We are in an increasingly global economy. Many workers can expect to spend part of their careers working elsewhere, and there are many foreign workers coming in and out of this country. These are the sorts of practical issues we need to be quite clear about in order to give guidance to employers and employees alike as to what the new regime is likely to allow and not allow. Having heard the Minister’s reasonable explanation, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.
Clause 16 ordered to stand part of the Bill.
Clause 17 ordered to stand part of the Bill.
Further consideration adjourned.—[Mr. David]

Adjourned accordingly at half-past Two o’clock till Tuesday 29 January at half-past Ten o’clock.